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Spirent measures up

Telecoms equipment testing specialist Spirent can generate efficiencies that its competitors can't match - but that's not reflected in its share price
November 22, 2012

UK-based Spirent Communications (SPT) piggybacks on the continuing rapid growth of telecoms, both fixed-line and mobile, by testing the equipment that networks operators roll out. But it does this more efficiently than its competitors. In the first half of 2012, its profit margin was 24 per cent and its key subsidiary, Performance Analysis, produced a 28 per cent margin. Rivals such as US-based Ixia and Japan's Anritsu struggle to compete with that, while North American test-and-measurement companies Aeroflex and EXFO trade at a loss.

IC TIP: Buy at 149p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Highly efficient operator
  • Acquisitions open up new markets
  • Resilience of Performance Analysis
  • Lots of cash
Bear points
  • Weaker demand for fixed-line testing
  • Analysts trimming forecasts

Given the wide range of testing tools at Performance Analysis, Spirent looks much better positioned than most to capitalise on increased customer spending. Performance Analysis, which tests next-generation telephone networks and mobile devices - by simulating the real world in the lab - is where Spirent sees the future. And it has beefed up the division's portfolio through acquisitions.

In September, it paid $52m (£32.6) cash to acquire privately held Metrico Wireless, bolstering its ability to test devices in the field as well as in the lab. In April, Spirent paid $40m cash for Mu Dynamics, which is now fully integrated into Performance Analysis. Mu brings cyber security expertise as well as the ability to emulate the performance of 'apps' - such as Facebook and Twitter - in lab conditions. This helps operators better manage the huge volumes of data traffic now traversing their networks. Fanfare, an earlier purchase, has quickened Spirent's testing times by automating processes.

Spirent is developing products internally, too. In February, it claimed an industry first when it unveiled a solution to test the performance of WiFi 'offload gateways'. The demand for gateways is increasing as mobile operators look to funnel traffic off their increasingly congested networks.

True, the group has difficulties. Financial uncertainty in the eurozone and both Chinese manufacturers and the US government putting spending on hold mean the group's revenue growth has flattened, and City analysts have trimmed their forecasts. Spirent's Service Assurance division has taken the biggest hit. During the first half, revenue there fell 46 per cent to $16.7m as fixed-line operators cut back spending on kit to test services running over their broadband networks. The third quarter saw a 31 per cent fall in sales, although first-half cost reductions still enabled Spirent to squeeze a $0.4m increase in operating profit from the division.

SPIRENT COMMUNICATIONS (SPT)

ORD PRICE:149pMARKET VALUE:£979m
TOUCH:148.5-149p12-MONTH HIGH:176p LOW: 104p
DIVIDEND YIELD:1.5%PE RATIO:15
NET ASSET VALUE:43pNET CASH:See text

Year to 31 Dec Turnover ($m)Pre-tax profit ($m)Earnings per share (¢)Dividend per share (¢)
20094278513.71.93
201048211211.82.50
201152812314.22.93
2012*48111811.82.93
2013*53213415.73.50
% change+11+14+33+21

Normal market size: 9,000

Matched bargain trading

Beta: 0.9

*JPMorgan Cazenove estimates £1=$1.59

Performance Analysis has been more resilient. In the first half of 2012, it managed a 22 per cent jump in adjusted operating profit to $62m on a 10 per cent sales increase to $219m. Revenues held steady during the third quarter, too, although operating profit was down 6 per cent. Sales of wireless test solutions were up, but weaker demand for testing wired infrastructure and delayed sales for positioning solutions dragged down performance.

But the positives still outweigh the negatives. Spirent's share price is some way off its 12-month high of 176p in February, when market sentiment was more bullish, yet there are signs that demand will pick up next year. US giant AT&T, for example, plans to increase capital spending on its networks, which should feed into more business for Spirent. Orders are also coming in for testing Compass, the Chinese navigation satellite system. More encouragingly, deployment of LTE - a superfast mobile broadband technology that's a key target market for Spirent - is still in its early stages. The Global mobile Suppliers Association, which tracks LTE deployments worldwide, says 89 operators had launched commercial LTE services in 45 countries by July. Another 280 operators, however, are committed to deploying the technology in 90 countries.

And cash flow is still strong. Cumulative cash generated in the first nine months was $68m, well ahead of the $43m generated in the same period of 2011. Moreover, the group had $192m of cash at the end of September even after paying for Metrico. A further $64m is in the pipeline from the recent sale of Spirent's Systems division, analysts think that will be used for share buy-backs.